BlackBerry’s “death spiral” appears set to resume. The troubled maker of smartphones has ditched plans to go private in a tentative deal that would have seen Prem Watsa’s Fairfax Financial and other investors pay $9 a share for the company—ostensibly providing a floor for the flagging stock. Instead, BlackBerry plans to raise $1 billion in cash through the sale of debt instruments that can later be converted into equity if BlackBerry’s shares return to the $10 mark. Investors weren’t thrilled with the deal, which threatens to dilute their holdings. They bailed out of the stock Monday, pushing it down 16 per cent to just $6.50.
Most analysts view the transaction as little more than a Plan B after Fairfax failed to find additional investors to fund its $4.7 billion privatization bid before a self-imposed deadline. That’s despite weeks of rumours of potential interest from everyone from co-founders Mike Lazaridis and Douglas Fregin to Facebook—suggesting few, if any, see much potential value in the one-time smartphone pioneer.
Under the new arrangement, Fairfax will by up to $250 million of the convertible debentures, which pay six per cent interest. If BlackBerry’s turnaround is a success Fairfax could add considerably to its current 10 per cent stake in the company. If it fails, it will be among the first in line during any bankruptcy given its new status as a debt holder.
While $1 billion in new capital is nothing to sneeze at, all it really does is buy BlackBerry a few more months to execute a turnaround plan that so far hasn’t worked. BlackBerry’s longtime supporters continue to flee the email-centric devices in favour of the iPhone and phones running Google’s Android software. Yet, in spite of its dwindling market share, BlackBerry opted last year to stay the course and continue development of its long-delayed BB10 operating system in the hopes of clawing its way back into the race. CEO Thorsten Heins cut costs and delivered the first BB10 device earlier this year, but he failed to whip up consumer enthusiasm for the flagging BlackBerry brand.
Now the tough job of digging BlackBerry out of an increasingly deep hole—the company burned through $500 million in cash during its most recent quarter—falls to incoming interim CEO John Chen, who will replace Heins in about two weeks once the debt sale is completed. While Chen has already put to rest rumours that he’s there to break up the company and sell it off in pieces, it’s far from clear how he plans to resurrect the business. “BlackBerry is an iconic brand with enormous potential—but it’s going to take time, discipline and tough decisions to reclaim our success,” Chen said in a statement.
Chen has faced challenging circumstances before. He was named CEO of a troubled enterprise software firm called Sybase in 1998 and returned it to profitability, ultimately selling the business to SAP for nearly $6 billion twelve years later.
At BlackBerry, Chen will have roughly six months—probably less—to pull off a similar feat.